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Paying the lunch bill

Dec 24,2019
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A scavenger looks for food in a heap of garbage in Caracas, Venezuela. [YONHAP]
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Argentina뭩 President Alberto 햚gel Fern?dez, center-left, waves his hand to his supporters after winning the general election on Oct. 27. Behind him is shown the image of Vice President Christina Fern?dez. [EPA/YONHAP]
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Kim Dong-ho
The author is an editorial writer of the JoongAng Ilbo.

Populism refers to political programs aimed at the masses. While they are packaged “for the people,” politicians often pursue populist platforms for their own political interests. Populism can become irreversible when popular sentiment actually kicks in.

Populism is also very addictive. Argentina and Venezuela are still paying the price. The dent in their fiscal balances from cash handouts and other hefty social benefits only deepened individual reliance on the state and fed a vicious cycle. A revolt against capitalism that demands more of a state role has helped fan populism across the world. The bill inevitably arrives on the doorsteps of future generations. But in the here and now, people are happy with the giveaways.

There is no such thing as a free lunch. Someone has to pay one way or another. Latin Americans became intoxicated with political slogans promising everything the people wanted. As that platform more or less sells the idea of a socialist heaven-on-earth, it is very hard to shake off populism once people are under its spell.

Argentina is a good example. Despite a yawning fiscal deficit and economic instability from the boom-and-bust cycles, the people have chosen a leftist government promising to hold up the populist campaign. Juan Peron, a former army colonel who ruled Argentina from 1946 to 1955, reigned again from 1973 to 1974. He would have stayed in power had he not died of an illness 10 months into his second term.

The sweet taste of populism is hard to resist. The state pays for basic welfare and people don’t have to work. In “Leviathan,” a 1651 book written by Thomas Hobbes, the author referred to the biblical sea monster as the rise of overbearing statehood that towers over individualism and entrepreneurship. An outsized state role depreciates the value of individual toil and honest wealth building. Argentina’s populism distrusted foreign capital, nationalized industries, and boosted workers’ incomes through increased welfare.

Despite the obvious risks, why does populism live on? Chronic wealth disparities are the primary cause. Populism can flourish regardless of advances in capitalism or global enterprises.

There are hardly any multinational enterprises in Argentina or Venezuela. Yet wealth inequalities exist. As in Adam Smith’s classic theory, a baker and shoemaker engaged in their work and trade would make different money and wealth. The disparities will widen depending on market demand. The hereditary factor is also a reason behind wealth disparities. But individual endeavors and labor plays a part in creating the gap.

But populism does not fully respect the innate human nature. It pursues equality, inflates minimum wages despite the ramifications on the market and companies and raises taxes on companies and rich individuals to buttress social welfare. Individualism is restrained through regulation and public jobs are added to make the state even bigger. Populist platforms are justified with such slogans as equality, fairness and justice. Politics overrule economic reasoning and kill entrepreneurship.

Populism loses its just cause because of its cherishing of the means of raising funds for its ambitious platforms. Argentina and Venezuela nationalized industries and shared the profits with their people. They overlooked the impact on productivity. Under uncompetitive state-run enterprises and a state-administered system where wages are paid regardless of the results, productivity cannot be sustained even with rich natural resources.

Venezuela had the richest oil reserves. When Hugo Chavez came to power in 1999, it kicked out foreign oil producers and nationalized oil reserves. Government spending went to social welfare, subsidies for increased minimum wages and shorter work hours, and to more government employees.

All of this is similar to the Moon Jae-in administration’s so-called income-led growth policy. The results were devastating. Investment, output and jobs all slumped because incomes were raised even without increases in outputs.

After Chavez, successor Nicolas Maduro continued on with his policies. When he came to power in 2013, Venezuela’s income from oil dramatically shriveled when oil prices fell as a result of the U.S. shale gas revolution. The government and people were too used to easy living to go on a diet. The government simply printed more money. It controlled prices if inflation shot up and bailed out companies if they went bust.

Over 5 million Venezuelan people have fled a country that has run out food and basic supplies. The average civilian lost 11 kilograms (24 pounds) in body weight last year. Even the trash cans have been emptied out. NHK showed a woman wailing because the only thing in her fridge was a bucket of water. Although the people are living in hell, Maduro blames it all on Americans, capitalists, and the mainstream elite.

Greece has been suffering since 2010 as a result of populism. Government employees retired before they reached the age of 50 because their monthly pensions were almost equal to their paychecks. Although under austerity program in return for multiple bailouts, the country is still in pain from reduced welfare benefits.

South Korea cannot be safe from such a disaster. The government has pressed ahead with populist platforms — a steep increase in the minimum wage, a universal 52-hour workweek, a raising of corporate tax from 22 percent to 25 percent, an increase in income tax from 40 percent to 42 percent. If public finances can afford it, welfare should be increased. But when they cannot, the public finances suffer and the economy is wrecked due to a heavier reliance on the state. Kim Kwang-doo, former vice chair of the presidential economic advisory board, warned that reckless spending is “making the people addicted to drugs.”

The National Assembly passed a supersized budget of 512 trillion won ($423 billion) for 2020 without the participation of the main opposition Liberty Korea Party. The budget was rubber-stamped without leaving records of any deliberations during the budget review. Although Korea’s fiscal deficit already stretched to 45.5 trillion won this year, the government plans to issue national bonds worth 60 trillion won to finance cash handouts worth 55 trillion won to the people.

Debt will pile up on the younger generation. By the time those in their 30s and 40s reach their 50s and 60s, Korea’s debt ratio against GDP would hit 100 percent from a current 37.1 percent. It took Greece and Spain less than 10 years for their debt ratio against GDP to jump to 100 percent from 40 percent. A policy planning committee under President Moon Jae-in even proposed bumping up the corporate tax and value added tax rates from 20.0 percent last year to 25 percent by 2045. The outline in support of welfare increases comes amid ever-worsening corporate incomes in a slowed economy.

Korea alone is chasing populism as France reforms its pension system and even Sweden is reducing its corporate tax rate from 30 percent to 21.4 percent to cut its welfare cost. The Moon administration must stop a campaign that burdens our future generations. Its duty is to build growth potential for the future generation starting with reforming the overly rigid labor sector and deregulating the market.

JoongAng Ilbo, Dec. 23, Page 26